Foreign Exchange Commentary

Summary

• Dollar strengthened as September rate cut expectations dropped from 83% to 72% following strong manufacturing PMI data.
• Jackson Hole Symposium anticipated for policy guidance, likely Fed Chair Powell's final appearance,
• Political pressure on Fed independence from President Trump's criticism of Governor Lisa Cook.
• The U.S PMI surged to 51.1, the strongest since May 2024, with manufacturing expanding for first time in three years.
• New U.S.-EU trade deal created mixed effects.
• ECB maintains dovish stance supported by improving economic indicator.

United States – Dollar Weakens after Powel’s Remarks at Jackson Hole
Over the week, the U.S. dollar strengthened as traders and investors recalibrated expectations for monetary easing in the coming months, positioning for possible guidance during the Jackson Hole Economic Symposium. With this likely being Fed Chair Jerome Powell's final symposium, traders and investors were waiting for policy tone signals and further directional clarity.

This week’s release of FOMC July minutes, PMI data, and weekly jobless claims provided mixed signals. Manufacturing and services activity showed resilience, while labor indicators pointed to a softer trend. At the beginning of the week, the chances of a September 25-basis-point rate cut were priced close to 83%, but the stronger-than-expected manufacturing PMI reading triggered a recalibration of those odds down to around 72% on Thursday. This simultaneously provided support for the U.S. dollar, which gained ground against major peers, including the euro and the British pound, while also reaching the highest levels seen in several weeks against the Japanese yen and Swiss franc.

However, during his speech today, Chair Powell made remarks that opened the possibility of such rate cut happening in September, highlighting that “the balance of risks appears to be shifting… and if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment”

In response to the speech, the front end of the yield curve dropped, dragging the dollar about 1% to the downside, also causing a strong rally in equities.

The market is now pricing the likelihood of a 25bps rate cut at 90%.

Also worth mentioning, earlier in the week, the U.S. dollar was under pressure due to political rhetoric, as President Trump's public criticism of Governor Lisa Cook restored concerns about the Fed's independence. President Trump also hinted at reshaping the central bank.

Euro-zone – Activity Rebound and Trade Policy Pressures
The euro benefited early in the week from unexpectedly strong economic indicators but struggled to sustain momentum given shifting macroeconomic dynamics. The Euro-zone composite PMI rose to 51.1—the strongest since May 2024—driven by a recovery in manufacturing, which achieved expansion for the first time in more than three years.

Stronger new orders and employment metrics provided renewed optimism about the eurozone's growth trajectory and reinforced the ECB's inclination to maintain a dovish stance and accommodative policy.

Nonetheless, progress was mitigated by the result from a newly agreed U.S.–EU trade deal. While the agreement offered market access benefits for U.S. exporters, it also introduced 15% tariffs on certain EU goods, threatening to undermine foreign demand and dampen confidence.

By the end of the week, the euro had retraced its earlier gains, declining approximately 1%, but Powell’s remarks at Jackson Hole and the drop in the dollar pushed the euro higher to 1.1721 (as of the time of this writing). The Euro continues to be considerably strong compared to the levels we saw at the beginning of the year.

United Kingdom – Growth Momentum and Inflation Pressures
The British pound demonstrated was relatively stable as stronger domestic activity supported the currency, but persistent inflation and fiscal issues weighed on expectations for monetary easing. The PMI rose to 53 in August—its highest reading in a year—driven by robust performance in services, even as manufacturing remained lackluster.

Headline CPI climbed to 3.8% in July, the fastest increase in nineteen months, while services inflation jumped to 4.8%. Though part of the increase reflected elevated travel costs, the persistence in price pressures reduced expectations of rate cuts in the near term. Markets now anticipate the Bank of England will not ease policy until well into 2026.

On the fiscal front, the government's borrowing fell below expectations to £1.1 billion in July. However, debt levels remain high, they currently stand close to 96% of GDP, and market participants continue to expect tax increases in the upcoming autumn Budget to address budget concerns.

As of the time of writing, the British pound traded close to $1.3533 amid modest gains and held near €0.866, pushed by the market reaction to Chair Powell’s remarks today.

Mexico – Peso Comes Under Modest Pressure Amid Easing and Inflation Creep
Mexico emerged as a focal point for policymakers and FX markets this week, as the peso fluctuated between 18.57–18.77 to the dollar amid evolving monetary and inflation dynamics. Analysts observed a slight weakening of the peso, attributed to expectations of continued interest rate cuts by Banxico, driven by historically subdued inflation and cautious growth projections.

The Bank of Mexico reduced its overnight policy rate by 25 basis points to 7.75% on August 7, with meeting minutes published this week, indicating a preference among most board members for slow and gradual easing. Three members supported continued rate cuts at a slower pace, while Deputy Governor Jonathan Heath dissented, calling for more restrictive policy, citing persistent core inflation at 4.23% and a lack of clear progress toward the 3% target.

Also on the inflation front, a Reuters poll pointed to a modest rise in headline inflation for the first half of August to approximately 3.66%—up from 3.48% in late July—which is still within Banxico's 3% ±1% target range. Core inflation ticked up slightly to 4.27%. Market consensus anticipates at least one more 25 basis point cut to 7.50% by the end of 2025, contingent on the path of inflation and alignment with Fed policy direction.

Banxico also highlighted that the peso's prior appreciation helped mitigate inflation pressures despite weakening external demand.

Longer-term projections remain cautious. A Reuters poll from earlier in the year forecast a moderate depreciation to approximately 19.80 MXN/USD over 12 months, following the expiry of a temporary freeze on U.S. tariff increases. Growth expectations for Mexico remain sluggish, with an estimated real GDP expansion of 1–1.5% in 2025. Private analysts anticipate modest peso depreciation by the end of 2025.